Home Mortgage Interest Definition
Home mortgage interest is generally any interest you pay on a
loan secured by your home (main home or second home).  The
loan may be a mortgage to buy your home, a second mortgage, a
line of credit, or a home equity loan.



Most home buyers take out a mortgage (loan) to buy their home.
They then make monthly payments to either the mortgage holder
or someone collecting the payments for the mortgage holder.

You can deduct home mortgage interest only if you meet all the
following requirements:
 

You must file Form 1040 and itemize deductions on Schedule A (Form 1040). You must be legally liable for the loan.  You cannot deduct payments for someone else if you are not legally liable to make them.  Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender. The mortgage must be secured debt on a qualified home.

Note that if your 2007 adjusted gross income exceeds $156,400
($78,200 if married filing separately), your home mortgage interest
deduction is subject to the 3% reduction of itemized deductions,
commonly known as the 3% phaseout rule!

Fully Deductible Interest
In most cases, all of the interest you pay on a mortgage to purchase
your home is fully deductible.  Whether it is all deductible depends
on the date you took out the mortgage, the amount of the mortgage, and
your use of its proceeds. 

Second mortgage interest is also included.  Your home mortgage interest is
generally reported to you on Form 1098, Mortgage Interest Statement by the
financial institution to which you made the payments.   

Essentially, in order for home mortgage interest to be deductible, the interest
you pay must be on a loan secured by your main home or a second home.
The loan can be a first or second mortgage, a home improvement loan, or
a home equity loan.

As with any deductible, the IRS has requirements that you must
meet.  To see the IRS Home Mortgage Interest Deduction Requirements,
click here.

Two Residence Limit for Home Mortgage Interest
There is a two residence limit for qualifying mortgage debt.  If
you own more than two houses, you will need to decide which
residence will be considered your second residence.  The home
mortgage interest on the second residence is fully deductible.   

If you own more than two houses, you will have to decide which residence
will be considered your second residence.  Interest on debt secured by
a residence other than your principal or second home may still be
deductible, but only if your use the proceeds for investment or business
purposes; ie a rental property.

Learn about your second home here


No Prepaying Home Mortgage Interest
With real estate taxes you can prepay your real estate taxes due
next year and deduct them on your tax return.  The rules are
different with home mortgage interest.  If you prepay interest for a
period that goes beyond the end of the tax year, you must spread
this interest over the tax years to which it applies.  You can
deduct in each year only the home mortgage interest that
qualifies as home mortgage interest for that year. 

Mortgage Prepayment Penalty
If you pay off your home mortgage early, you may have to pay a
penalty.  You can deduct the penalty as home mortgage interest
provided the penalty is not for a specific service performed or
cost incurred in connection with your mortgage loan.

Refinanced Home Mortgage Interest
If you refinance your original mortgage for an new mortgage that is
greater than your original one, you cannot deduct interest
"in excess" of the current balance on your original mortgage.

Ex: Greg and Katie originally obtained a $250,000 mortgage to
purchase their home.  Several years later, their original mortgage
has been reduced to $220,000.  If they were to refinance their home,
they would not be able to deduct interest on a new mortgage above
$220,000.  Assume they refinanced their home and their new
mortgage was increased to $240,000.  Interest on the $20,000 excess
($240,000 - $220,000) cannot be deducted.

Mortgage Loan Tip
Even though your home mortgage interest is tax deductible, you
still want to get the lowest possible interest rate.  There is no
need to overextend yourself with your monthly mortgage payment.

Refund of Home Mortgage Interest
If you receive a refund of home mortgage interest that you deducted
in an earlier year and that reduced your tax, you generally must
include the refund in income in the year you receive it. 

The amount of the refund will usually be shown on the mortgage interest
statement you receive from your mortgage lender.



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